Elon Musk’s Twitter Takeover Seen Swelling the Company’s Debt

That interest burden means Twitter will need to find ways to make revenue grow and expand profit margins, said

Jordan Chalfin,

a senior analyst at credit-research firm CreditSights. “They’ll probably burn a significant amount of cash,” he said.

Because some of the buyout debt is expected to be a floating rate, Twitter could end up paying more, analysts said, based on the details previously laid out in the documents. The Federal Reserve has raised rates this year and is expected to do so again in November.

Meanwhile, the broader business environment has gotten more challenging, particularly for social-media companies because of headwinds in the digital advertising industry.

Snap Inc.

shares fell sharply Friday after the company reported slower sales growth.

Those factors could help explain why Mr. Musk, who plans to take the company private with the acquisition, has said he is concerned about costs exceeding revenue at Twitter. Amid the uncertainty, employees have wondered for months about potential layoffs.

Twitter declined to comment. Representatives for Mr. Musk didn’t respond to requests for comment.

While Mr. Musk’s specific plans for Twitter remain unclear, he has indicated he would make a number of changes, including limiting content moderation and shifting away from Twitter’s heavy reliance on advertising. Advertising accounted for more than 90% of Twitter’s revenue in the second quarter.

The billionaire entrepreneur has overcome long odds before, turning

Tesla Inc.

into the world’s most valuable car company and Space Exploration Technologies Corp., better known as SpaceX, into the world’s busiest rocket-launch operation. Several analysts said they expect Mr. Musk could galvanize Twitter’s business prospects, though they expect a bumpy transition and say it could take years.

“There’s a real possibility that, given this pretty large interest burden, they’re going to need additional capital over the next two years or so,” said Mr. Chalfin, the CreditSights analyst.

A number of other tech companies recently have cut jobs or slowed hiring because of concerns about the economy. If Mr. Musk completes the takeover, “I wouldn’t be surprised if there’s greater focus on efficiency,” said

Rohit Kulkarni,

an analyst at MKM Partners.

Raising the prospect of layoffs could have a self-fulfilling effect, Mr. Kulkarni added. “That could lead to more organic churn and save them from paying large amounts of money to employees on severance,” he said.

Earlier this year, Twitter said it was looking for ways to cut costs because of economic uncertainty, adding that it had significantly slowed hiring in the second quarter, according to a Securities and Exchange Commission filing in July. Twitter has posted a loss in eight of its past 10 fiscal years, according to FactSet.

Mr. Musk told employees in June that he believed costs were “not a great situation” at Twitter, according to people who viewed the virtual meeting. He didn’t rule out layoffs, adding that anyone who is a significant contributor shouldn’t worry, according to the people.

Mr. Musk’s lawyers have also hinted at potential layoffs, writing in a court filing that economic uncertainty could “potentially require head count reductions to control costs.”

Twitter had more than 7,500 employees at the start of this year. In April, as Mr. Musk was moving to buy Twitter, entrepreneur and Musk supporter Jason Calacanis suggested cutting the number of Twitter employees to roughly 3,000, according to messages between him and Mr. Musk.

The private messages were released as part of a court case over Mr. Musk’s efforts to back out of the deal. A Delaware judge paused the case earlier this month, after Mr. Musk again changed his position and said he intended to proceed with the deal at its original price.

A staff of 3,000 would represent the lowest number since 2013, the year Twitter went public, when the platform had about 2,700 employees and its revenue was roughly 13% of its level last year. Twitter’s employee numbers ranged between approximately 3,000 and 4,000 for several years from that point, until they began climbing in 2019. Twitter has said that the increase in recent years was focused on investments in engineering, product, design and research.

Snap said in August that it would slash its head count by a fifth from 6,400 after a slowdown in its business.

It isn’t unusual for a new owner to look for ways to cut costs and make other changes after a leveraged buyout, said

Steven Hunter,

chief executive at 9fin, a leveraged-finance data and research company.

“If you’ve got a large amount of debt in your business, then that’s consuming your cash flows and your earnings,” he said. “That’s less money that you have for investing in the business.”

Write to Alexa Corse at [email protected]

That interest burden means Twitter will need to find ways to make revenue grow and expand profit margins, said

Jordan Chalfin,

a senior analyst at credit-research firm CreditSights. “They’ll probably burn a significant amount of cash,” he said.

Because some of the buyout debt is expected to be a floating rate, Twitter could end up paying more, analysts said, based on the details previously laid out in the documents. The Federal Reserve has raised rates this year and is expected to do so again in November.

Meanwhile, the broader business environment has gotten more challenging, particularly for social-media companies because of headwinds in the digital advertising industry.

Snap Inc.

shares fell sharply Friday after the company reported slower sales growth.

Those factors could help explain why Mr. Musk, who plans to take the company private with the acquisition, has said he is concerned about costs exceeding revenue at Twitter. Amid the uncertainty, employees have wondered for months about potential layoffs.

Twitter declined to comment. Representatives for Mr. Musk didn’t respond to requests for comment.

While Mr. Musk’s specific plans for Twitter remain unclear, he has indicated he would make a number of changes, including limiting content moderation and shifting away from Twitter’s heavy reliance on advertising. Advertising accounted for more than 90% of Twitter’s revenue in the second quarter.

The billionaire entrepreneur has overcome long odds before, turning

Tesla Inc.

into the world’s most valuable car company and Space Exploration Technologies Corp., better known as SpaceX, into the world’s busiest rocket-launch operation. Several analysts said they expect Mr. Musk could galvanize Twitter’s business prospects, though they expect a bumpy transition and say it could take years.

“There’s a real possibility that, given this pretty large interest burden, they’re going to need additional capital over the next two years or so,” said Mr. Chalfin, the CreditSights analyst.

A number of other tech companies recently have cut jobs or slowed hiring because of concerns about the economy. If Mr. Musk completes the takeover, “I wouldn’t be surprised if there’s greater focus on efficiency,” said

Rohit Kulkarni,

an analyst at MKM Partners.

Raising the prospect of layoffs could have a self-fulfilling effect, Mr. Kulkarni added. “That could lead to more organic churn and save them from paying large amounts of money to employees on severance,” he said.

Earlier this year, Twitter said it was looking for ways to cut costs because of economic uncertainty, adding that it had significantly slowed hiring in the second quarter, according to a Securities and Exchange Commission filing in July. Twitter has posted a loss in eight of its past 10 fiscal years, according to FactSet.

Mr. Musk told employees in June that he believed costs were “not a great situation” at Twitter, according to people who viewed the virtual meeting. He didn’t rule out layoffs, adding that anyone who is a significant contributor shouldn’t worry, according to the people.

Mr. Musk’s lawyers have also hinted at potential layoffs, writing in a court filing that economic uncertainty could “potentially require head count reductions to control costs.”

Twitter had more than 7,500 employees at the start of this year. In April, as Mr. Musk was moving to buy Twitter, entrepreneur and Musk supporter Jason Calacanis suggested cutting the number of Twitter employees to roughly 3,000, according to messages between him and Mr. Musk.

The private messages were released as part of a court case over Mr. Musk’s efforts to back out of the deal. A Delaware judge paused the case earlier this month, after Mr. Musk again changed his position and said he intended to proceed with the deal at its original price.

A staff of 3,000 would represent the lowest number since 2013, the year Twitter went public, when the platform had about 2,700 employees and its revenue was roughly 13% of its level last year. Twitter’s employee numbers ranged between approximately 3,000 and 4,000 for several years from that point, until they began climbing in 2019. Twitter has said that the increase in recent years was focused on investments in engineering, product, design and research.

Snap said in August that it would slash its head count by a fifth from 6,400 after a slowdown in its business.

It isn’t unusual for a new owner to look for ways to cut costs and make other changes after a leveraged buyout, said

Steven Hunter,

chief executive at 9fin, a leveraged-finance data and research company.

“If you’ve got a large amount of debt in your business, then that’s consuming your cash flows and your earnings,” he said. “That’s less money that you have for investing in the business.”

Write to Alexa Corse at [email protected]